Marcus Millichap: Cap Rate/Treasury Spread Means Buy Commercial Real Estate (CNBC Video, 12/15/2010)

According to Hessam Nadji at Marcus & Millichap, commercial real estate is a buy based on valuation. The spread between Cap Rates (Net Operating Income/Purchase Price) and Treasury Yields is at 480 basis points (4.8%), which has historically been a "buy" signal for commercial real estate. So higher CRE prices will close the Cap Rate/Treasury gap. I see that the ten most active markets in the U.S. have cap rates between 6.35%-7.79% (avg = 7.19%) at Real Capital Analytics. The 10-year yield is at 3.33%. I found a chart of the NCREIF Cap Rate to Treasury spread in a September blog post. Also read this Bloomberg article. Is NCREIF cap rate data available anywhere?

I'm curious how CRE analysts factor in the Federal Reserve subsidizing Treasury yields and the risk of bond vigilantes, at some point in the future, abruptly ending the 30 year bull market in bonds. What happens if Treasury Bond volatility spikes (MOVE Index) and Treasury Yields/Cap Rates invert? Would that affect CRE prices? Reggie Middleton of the BoomBustBlog mentioned this not too long ago on Bloomberg TV (video below).

I guess if you have banks willing to finance distressed commercial real estate at 100% LTV (loan-to-value) for 2.5% fixed over 10 Years that's a decent deal. Buy it for free and sell it at the 50% retracement level (Moody's/REAL Commercial Property Price Index) pre-bond bust. If we are in a 5-10 year period of price stability (Fed stimulus/de-leveraging), low rates and slow economic growth, that could possibly work. No? Hessam Nadji wrote articles at recently: More Clarity, Low Interest Rates to Propel CRE Sales (11/11/2010) and Inflation, Interest Rates to Remain Tame in 2011 (12/17/2010). On CNBC he gave some details on the market.

Apartments: Own to be risk averse
Retail: Dark horse
Office: Not quite as nimble, lease renewals at lower rents coming
Hotel: Heading back up with rebound, but more volatile with economic activity

Videos feature: Hessam Nadji (Managing Director of Research and Advisory Services at Marcus & Millichap), Richard S. LeFrak (Chairman, President and CEO of the LeFrak Organization who owns 25,000 apartments) and Wilbur Ross (W L Ross & Co).

Reggie Middleton talking about commercial real estate in September, 2010